Financial Incentive Structure for AIA Trials Destroys Due Process at PTAB, New Vision Gaming Argues

“‘Due process requires an impartial and disinterested tribunal’ and New Vision argues that the link between AIA reviews and the revenue they generate ‘has created a structural bias unlike any other in the federal executive branch.’” June 30, New Vision Gaming & Development filed a corrected appellant brief with the U.S. Court of Appeals for the Federal Circuit challenging two covered business method (CBM) reviews conducted at the Patent Trial and Appeal Board (PTAB) which canceled all claims of New Vision’s patents covering a gaming invention. Among other things, New Vision argues that the PTAB is constitutionally flawed, that its structure creates financial incentives for administrative patent judges (APJs) to grant validity reviews in a way that destroys due process for patent owners, and that the PTAB’s APJs have neither the judicial independence nor the oversight of Article III courts necessary to address the impermissible appearance of bias at that tribunal.

The case stems from a business agreement between New Vision Gaming and gambling product firm Bally Gaming, now known as SG Gaming. Under that agreement, SG Gaming was to pay royalties to New Vision for its use of a novel bonus hand feature for a card game, such as poker or blackjack, one of many gaming industry innovations spawned by inventor John Feola. Though the game was patented, the agreement discussed no infringement obligations and based royalties upon SG Gaming’s use of that Feola’s bonus hand feature. The agreement also had a clause handling remedies in the event that Feola’s patents were ruled to be invalid as well as a forum selection clause for handling contractual disputes in Nevada District Court, which is where New Vision sued after SG Gaming stopped paying royalties. The patent aspects of that case were stayed when SG Gaming petitioned for CBM review of the asserted patent claims at the PTAB.


Salary Bonuses, Lack of Judicial Independence = No Due Process for Patent Owners

In its statement of the case, New Vision Gaming notes that the America Invents Act (AIA) fundamentally altered the process for challenging patent validity by creating CBM, inter partes review (IPR) and post-grant review (PGR) proceedings adjudicated by APJs at the PTAB. New Vision cites statistics showing that, as of April 2020, a total of 11,401 petitions for AIA trials had been filed at the PTAB. Institution rates for those trials have ranged from 55% to 87%; 62% of completed trials have cancelled all challenged patent claims; and 80% of completed trials have invalidated at least one claim.

PTAB trials are very lucrative for the U.S. Patent and Trademark Office (USPTO), a federal agency which is primarily funded through user fees that the agency has substantial authority in setting and adjusting. The proposed agency fee structure for 2021 would charge $20,000 to entities petitioning for CBM reviews at the PTAB, as well as $475 per challenged claim in excess of 20 patent claims challenged by the petition. Proposed 2021 fees for trial-phase CBM reviews are $27,500 plus $1,050 per challenged claim in excess of 20. These fees are closely tied to cost estimates for conducting these proceedings.

There’s no question that the PTAB has grown dramatically in the years since the AIA was passed, increasing from 60 APJs in 2011 up to around 260 APJs by 2020. The USPTO performance rates each APJ, and each APJ rated as “Fully Successful” is eligible for financial bonuses ranging from $4,000 to $10,000, as well as a potential 5% salary bonus. Although at least three APJs sit on a panel for each AIA trial, 98% of trials have resulted in unanimous decisions through November 2017. Internal emails released by the USPTO pursuant to Freedom of Information Act (FOIA) requests show that APJs must submit a request with the PTAB’s Vice Chief Judge for a dissenting or concurring opinion to be counted towards productivity totals. An internal email sent May 7, 2009, and signed by Jay Moore and Allen MacDonald, both of whom have served as the PTAB’s Vice Chief Judge, states that “[c]oncurrences, dissents, and remands are not normally efficient mechanisms for securing the ‘just, speedy, and inexpensive’ resolution of an appeal before the Board.” That FOIA response also includes policy documents on APJ performance ratings indicating that to be considered “Fully Successful,” an APJ must produce at least 75 decisional units within one year. While ex parte appeals of patent applications and appeals of reexamination proceedings have specific decisional unit values applied to them, “[d]ecisions and orders in AIA trial proceedings… will be assessed on a case-by-case basis, based on the complexity of the proceeding.” These determinations are made by the PTAB’s Deputy Chief Judge, according to those documents.

New Vision Gaming’s experience at the PTAB provides many examples of how the process at the PTAB appears to be biased against patent owners and in the petitioner’s favor. The PTAB instituted SG Gaming’s CBM review despite New Vision’s argument that the validity dispute was contractually required to be conducted in Nevada federal court. In determining that the patent claims were invalid under 35 U.S.C. § 101 for being directed to the abstract idea of allowing bonus wagers in a game, the PTAB did not discuss the innovative aspects of forming a bonus hand from a plurality of hands, a novel and unknown concept in gaming prior to Feola’s innovation, says the brief. The PTAB dismissed a motion to amend claims by New Vision that would have added hardware-oriented language to survive the Section 101 challenge. The PTAB declined to reconsider its institution decision, the PTAB told New Vision it had the burden of identifying a contractual estoppel defense without stating whether it was exercising its discretionary authority to consider New Vision’s argument, and the PTAB denied a request for rehearing filed after it invalidated all claims of two New Vision patents challenged by SG Gaming.

Supreme Court Cases on Ohio Mayor’s Court Proceedings Set the Stage

“Due process requires an impartial and disinterested tribunal” and New Vision argues that the link between AIA reviews and the revenue they generate “has created a structural bias unlike any other in the federal executive branch.” Performance reviews by superiors eliminate judicial independence for APJs, dissents are discouraged, the Board is financially incentivized to grant reviews to collect more user fees and APJs are incentivized by salary bonuses to grant them. Article III judges and administrative law judges (ALJs) at other federal agencies such as the U.S. International Trade Commission can’t receive bonuses and New Vision contends that the financial bonuses to PTAB APJs “further contributes to the impermissible structural bias inherent in the AIA institution decisionmaking process.” That process of making institution decisions became a lot more insulated thanks to the U.S. Supreme Court’s decision this April in Thryv v. Click-To-Call Technologies, which largely foreclosed any chance for review of PTAB institution decisions in federal court.

Much of New Vision Gaming’s constitutionality argument is premised on the Supreme Court’s 1927 decision in Tumey v. Ohio, a case that asked the Court to decide whether Ohio state provisions allowing local mayors to prosecute individuals accused of violating the Prohibition Act. In an opinion authored by then Chief Justice William Howard Taft, the Court held that “[e]very procedure which would offer a possible temptation to the average man as a judge… which might lead him not to hold the balance nice, clear and true between the State and the accused, denies the latter due process of law.” The Court found that the mayor’s “direct, personal, substantial pecuniary interest” by compensating mayors for each defendant convicted violated due process because that compensation was paid for through the criminal fines collected from convicted defendants. Along with this bonus pay for convictions, the mayor’s motive to address the financial need of his village by graduating fines and convicting defendants also violated due process in Tumey.

Ohio mayor’s courts received another adverse decision in 1972 when the Supreme Court ruled in Ward v. Village of Monroeville that the fees imposed by the mayor through that court violated due process because those fees contributed a major portion of village income. The opinion authored by Justice William Brennan found that the arrangement provided a “possible temptation” because “the mayor’s executive responsibilities for village finances may make him partisan to maintain the high level of contribution from the mayor’s court.” Thus, the scheme violated due process because there were insufficient procedural safeguards to guarantee a safe trial. As Justice Brennan wrote, “[p]etitioner is entitled to a neutral and detached judge in the first instance.”

New Vision Gaming also notes differences between the PTAB’s APJ financial incentive structure and another Ohio mayor’s court proceeding which was challenged but upheld by the Supreme Court in Dugan v. Ohio (1927). In another opinion authored by Chief Justice Taft following another conviction obtained by a mayor for illegal possession of alcohol, the Court found that there was no unconstitutional due process violation posed by the link between fees collected by the mayor and compensation to the mayor for acting as judge. In this financial scheme, monies collected through fines were deposited into a general fund from which the mayor was paid for his duties in conducting the proceeding. The existence of four other people sitting on a city commission controlling the general fund expenditures provided procedural safeguards and the tie between the mayor and the general fund was too remote to cause the mayor to be motivated to favor particular outcomes in cases.

The Federal Circuit Could Issue a Narrow Remand Under Arthrex

While New Vision Gaming makes strong arguments regarding due process violations throughout the brief, there are other grounds it raises under which the Federal Circuit could issue a remand. It’s possible, and perhaps even likely, that the court will issue a remand under precedent from its 2019 decision in Arthrex v. Smith & Nephew. In other decisions defining the contours of this ruling, the Federal Circuit has held that Arthrex immediately cured the unconstitutional appointment process for APJs and while final PTAB decisions issued after Arthrex cannot be remanded under that case, New Vision Gaming’s CBM reviews ended last June, three months before the Federal Circuit issued Arthrex. New Vision Gaming also argues that the PTAB improperly applied case law regarding Section 101 patent eligibility analysis under Alice/Mayo, though both the Federal Circuit and the Supreme Court have largely been incapable of developing a workable test for the Alice/Mayo standard to give patent owners much hope of winning Section 101 arguments in federal court. However, even if the Federal Circuit decides this case on the narrower grounds presented by Arthrex, the due process constitutionality arguments presented by New Vision makes its case an interesting one to follow over the near future.

SG Gaming offered no comment in response to an emailed request from IPWatchdog. Its responsive brief is currently due in August.

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Join the Discussion

5 comments so far.

  • [Avatar for Bemused]
    July 17, 2020 11:33 am

    Nice attack on the AIA/PTAB by New Vision Gaming. But nothing will come out of this challenge.

    The CAFC could have cut back on the power (and abuses) wreaked upon patent and patent owners by the PTAB) years ago. Instead, the abdicated their oversight role (in point of fact, they elevated the PTAB above the judiciary when it comes to nearly all things patent).

    Truly, I’ve never seen a more corrupt and bankrupt (morally and intellectually) group of individuals than those anti-patent dummies that sit on the CAFC and SCOTUS

  • [Avatar for Anon]
    July 16, 2020 09:34 am

    Mr. Malone,

    This WAS Congress (albeit, I can easily see that this was a Congress bought and paid for by the likes of Google).

    We cannot dismiss the fact that it was Congress that passed the AIA. After accepting that fact, then we can talk about agency capture (with ‘agency’ being used in a more generic sense).

  • [Avatar for Josh Malone]
    Josh Malone
    July 15, 2020 09:26 pm

    Anon, this was not Congress. This was Google. They wrote the rules in 2012 to transfer the institution to the PTAB where they were stacking the Board with 200 of their lackeys. I believe they were hedging to prevent someone like Iancu from controlling the institution decision.

  • [Avatar for Pro Say]
    Pro Say
    July 15, 2020 07:55 pm

    “The only valid patent . . . is one we’ve yet to get our anti-patent hands on.”

    — PTAB
    — CAFC
    — SCOTUS

  • [Avatar for Anon]
    July 15, 2020 06:27 pm

    Nice wrinkle.

    As has been pointed out (in other IP contexts), just because Congress passes a law, does not mean that such a law passed scrutiny (under a critical evaluation of various factors, notably Constitutional ones).